Benefiting from weaker Ringgit and increased capacity. Similar to other exportbased plastic packagers, BPPLAS is riding on the wave of higher revenue driven by: (i) export sales (79% of total sales) benefitting from a depreciating Ringgit, (ii) low resin prices due to falling Crude oil prices since Nov-14 and excess supply. Notably, 62% of sales are in USD, 21% in MYR, 10% in SGD and the balance in Euro and Yen. Revenue may see some slight pullback YoY from weaker domestic sales due to higher cost, and GST implementation. However, this is expected to be mitigated by management’s plan of increasing export sales to above 80% by end 4Q15 as additional capacity (800MT/month) kicked in which expanded capacity by 19%. BPPLAS is targeting markets such as Japan, ASEAN, Far Eastern countries and Australia. We also expect resin prices to be stable for now at USD1,100/MT due to the oversupply of resin and low Crude oil prices. As such, we expect the 4Q15 results to be the strongest quarter for the year as net margins are estimated to improve to c. 6.6% in FY15 (from 3.6% in FY14).

Planning to increase capacity by FY17. BPPLAS has 25 machines currently (5 cast stretch machines, and 20 blown film machines) with a total capacity of 54.8k-61.2k MT p.a. in FY15-16 which we estimate are operating at an average utilisation of 70% after the inclusion of a new stretch cast machine in June 2015 worth RM13.5m, increasing monthly capacity by 19% to 5,100MT/month. Additionally, there are plans for new machinery in FY16-17, which are still at its infancy. It is likely that management will acquire new stretch cast machinery, which could potentially increase capacity by another 800MT/month which we believe could add an estimated RM43.7m p.a. revenue in FY17E, which is not yet built into our estimates. We like the fact that BPPLAS will not require a cash call or seek additional borrowings to expand due to its strong net cash of RM42m, which is more than sufficient to fund new capacity.

Better margins than peers. BPPLAS specialises in polyethelyn film, which are mostly used for industrial packaging and bag manufacturing and hence is comparable to the likes of TGUAN and SCIENTX. Interestingly, BPPLAS is able to command stronger EBIT margins at 10% vs. 5% for TGUAN, and 6% for SCIENTX, which is likely due to: (i) better operating efficiency from managing a single plant and business segment vs. its peers that have multiple plants and also diversifications into other segments (i.e., property), (ii) better cost management (i.e. reduction in labour cost from increased automisation), and (iii) better product mix.

Cash rich = dividends. We like management’s prudent approach to its balance sheet as BPPLAS is in a strong net cash position of 26.8% (to shareholders' fund) currently and has maintained a net cash position for the last 25 years. The company does not have a formal dividend policy, but management has been paying out 4.0 -6.0 sen dividends p.a. for the past six years and we expect this to increase going forward, in line with the additional capacity and improved margins. We estimate FY15E dividend of 8.0 sen (which includes a 2.0 sen special distribution). Stripping that out, FY15 DPS implies a 60% payout ratio based on our estimates. As such, assuming a similar payout ratio, FY16-17E DPS translates to 7.4-9.2sen (4.2-5.2% yield).

Projecting earnings growth of 25-24% for FY16-17E. For FY15E, we expect a strong growth of 84% due to stronger EBIT margins from low resin cost, and as mentioned, 4Q15 will be its strongest given the stronger USD and additional capacity contributions, which should spill over into FY16-17E. This should allow for stronger EBIT margins of estimated 13.5% FY15, FY16-17E (vs. 9% in FY14) as raw material cost remains fixed for now. Additionally, we believe our USD assumptions are fair at RM4.20-4.20 in FY16-17E.

Trading Buy with a fair value of RM2.15 (21% total returns) based on an applied Fwd PER of 14.0x on FY17E EPS of 15.4sen. Our applied PER is derived based on comparisons to industrial packaging peers under our coverage; (i) valued above TGUAN (11.0x PER) due to BPPLAS’s better EBIT margins (10% vs. TGUAN’s 5%) and higher earnings growth in FY16E of (25% vs. TGUAN’s 13%), but (ii) is valued on par with SCIENTX (14.0x FY16 PER) as SCIENTX’s manufacturing EBIT margins expected to improve in FY16 to 9% (from 6%), but earnings growth is stronger at 42%, while consumer packagers like SLP (15.5x PER) carries a higher premium given higher EBIT margins (20%) from value-added activities. Industry-wide, the sector will track the forex trend, and Crude oil prices that affect resin cost. As such, we caution on a reversal risk in revenue growth and margins, which are based on blue-sky scenarios currently. Similar to our Rubber Gloves sector (i.e. export based, largely USDdenominated), we have chosen to roll forward our valuations to FY17 (2-year forward) as we believe markets are more forward looking as this sector is one of the few beneficiaries of a weak ringgit and low oil prices. 

Source: Kenanga Research - 3 Feb 2016